A practical guide to swing trading

Page 10 − use SwingTracker and identify swing trading opportunities yourself, whenever you’d like − Use the Master Plan to enter and exit your trades − Be disciplined and have patience

A Practical Guide

to Swing Trading

by Larry Swing

Forewords by Suri Dudella (sixer.com),

& Sergey Perminov (optionsmart.com)

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A Practical Guide

to Swing Trading

by Larry Swing

Forewords by Suri Dudella (sixer.com),

& Sergey Perminov (optionsmart.com)

Dedicated to my wife and our two children My dear wife’s support made it possible for me to devote the time necessary to develop my web

site and write this guide

To all the new and experienced swing traders

that read this book

May the swing be with you

Larry Swing

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1 Table of Content

1 Table of Content 4

Introduction 7

2 About the book 9

2.1 Who should read this book 9

2.2 How to get started swing trading 9

2.3 What will this book teach you 10

2.4 Prefaces 10

3 Meet Larry 13

3.1 Contact 15

4 An Introduction to Swing Trading 16

4.1 What is Swing Trading 16

4.2 Let’s Look at an Up Trends 16

4.3 Let’s Look at a Down Trend 17

4.4 The Steps in Swing Trading 18

4.5 What Can You Expect? 19

4.6 How Do You Identify Stocks that are Appropriate for Swing Trading? 19

4.7 What Tools are Available? 19

5 Pattern Recognition Criteria 24

5.1 Technical Analysis Measures used to Recognize Swing Trading Patterns 24

6 The Master Plan – Entry and exit rules that insure successful swing trading 26

6.1 WHAT is the Master Plan 26

6.2 Taking a Profit and Preserving Capital 27

6.2.1 Profit is taken using a “sell limit” order – once the price

is reached, the specified number of shares are sold .27

6.2.2 Capital is protected using a “stop loss” order – when the stop price is reached, all the shares are sold .27

6.2.2 28 6.3 When to Enter the Trade 28

6.4 How to Enter the Trade 28

6.5 What to do After the Trade is Executed 29

6.6 What to do the Day After the Trade is Executed 30

6.7 What happens if the Trade is Not Executed 30

6.8 Once half the shares close at a 7% profit, the other half remains open to “ride the wave” When do we close the second half of the trade? 32

6.9 The Short Swing – how we make money when we think the price of the stock is going down 32

7 Preferred Brokers 34

7.1 Interactive Brokers Error! Bookmark not defined. 7.2 optionsXpress Error! Bookmark not defined. 8 The Essentials of Technical Analysis 36

8.1 Intro 36

8.2 Why does Technical Analysis work? 36

8.3 The Basics 36

8.4 Japanese Candle sticks 37

8.5 Volume 38

8.6 Equivolume 38

8.7 Moving Averages 40

8.8 Force Index 42

8.9 Directional Moving Index 44

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8.10 Up/Down/In/Out 44

9 SwingTracker 46

9.1.1 Features 46

10 FREE SwingLab 54

10.1 Starting with SwingLab 54

10.1.1 Starting to swing 54

10.1.2 Cut and Paste 57

11 Case Studies 60

12 Appendix A–Short Selling 69

12.1.1 What does it mean to sell short? 69

12.1.2 Where Does The Broker Get The Stock? 69

12.1.3 How Do I Sell Short? 70

12.1.4 Up Tick Rule 71

12.1.5 Why Sell Short? 71

13 Appendix B– Ressources 73

Introduction

This book is a simple, practical guide to swing trading For years I have been

reading books and exploring web sites that are dedicated to swing trading Yet, I could not find any simple description of how to enter and exit a trade So I

developed some basic rules that have been published on my web site

www.mrswing.com I call these rules The Master Plan Over the years, thousands

of investors have used my Master Plan to swing trade It is my firm belief that a swing trader must trade with discipline While it is important to keep things

simple, the rules of the Master Plan might seem a little intimidating The main reason I wrote this book was to make swing trading more accessible to the

beginner These rational behind swing trading and the entry and exit rules are presented very clearly – both the beginner and the experienced swing trader will now have a simple guide to follow

To quote Albert Einstein: "Things should be made as simple as possible, but not any simpler" This is the principle I followed while writing this book

Why does swing trading work?

Because you are trading in the direction of the trend You

wait for a pullback before entering the trade, and you enter

only if the stock shows a sign that it’s price will continue in

the direction of the trend

The main objective of a swing trader is to profit from swings in price

movement over the course of several days While we might trade every day, we are

not day traders As swing traders, we have the patience to wait until our profit

goals have been reached Fortunately, the wait is not too long A typical trade is only in play from a few days to a few weeks When a trade is closed, the funds go into the next trade

Money management is very important in swing trading I divide my trading capital by 15 This is the amount that I put into each trade As the total account grows, the amount of each trade grows If you can handle a larger number of

You must make a personal decision as to whether you want to trade on margin

or not If you are more conservative, you will only trade with the cash that you have

on hand As I discuss later in the book, margin is necessary for selling stocks short, so it is important to have your account approved for margin trading, even if

you don’t plan to trade on margin

The stocks I identify as good swing trading opportunities are made available each day through my MasterSwings service Once a week, my picks are made

available on my website – www.mrswing.com – or by e-mail, through my free

MrSwing Lite service

Swing trading should be both profitable and fun Through the guidelines

outlined in this book, you can achieve both of these simple objectives

2 About the book

2.1 Who should read this book

• If you (like many investors) are disenchanted with buy-and-hold investing, swing trading may be right for you Even if you invested in great companies,

it is likely that the value of your investments has diminished substantially over the past few years

• If you’re not a stock market expert, yet would still like to make money in the stock market

• Day trading requires both stock market expertise and the ability to constantly

watch the market If day trading is not for you, swing trading might

satisfy your needs

• If you are disciplined and patient – the swing trading methodology outlined in this book will teach you how to trade successfully with very little risk

However, you must carefully follow the Master Plan, and you must be

patient – profits come slowly, but surely The total value of your investment account will go up This is in sharp contrast to the buy-and-hold strategy, where losing money is more common than we would like to admit

Swing trading allows you to accumulate small gains weekly, ultimately making

money through a disciplined, low-risk trading approach While swing trading is not for everyone, this book will help you determine if swing trading is right for you It provides a treasure map to the pot of gold which is found at the end of the rainbow

2.2 How to get started swing trading

• Read this book

• Open an account with an online discount broker (recommendations are

provided)

• Select a method for identifying swing trading opportunities

− subscribe to a service like MasterSwings and get several swing trading

suggestions each day

− use MrSwing Lite and get free swing trading suggestions each week

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− use SwingTracker and identify swing trading opportunities yourself,

whenever you’d like

− Use the Master Plan to enter and exit your trades

− Be disciplined and have patience

2.3 What will this book teach you

• the rational behind swing trading

• how to identify stocks to swing trade

• when to enter a trade

• when to exit a trade

• how to maximize profits and minimize risk

• what tools are available to help you select stocks and monitor your progress

• what books to read to learn more about swing trading

The best part of my swing trading method is that you do not have to watch your

positions during the day Simply enter an order to buy or sell short, give your

discount broker the buy order and two sell orders and go back to your daily life

2.4 Prefaces

Suri Duddella, siXer.com

Traders and investors study markets through price charts These powerful visual tools offer a common language for all stocks, options, and indices The theory

behind this is called Technical Analysis Technical Analysis begins with a simple

observation that all market activity is reflected in the activity of price and volume over time These three pieces of information create a profound visual representation when properly presented in a chart

Prices rise and fall, with rising prices being stimulated by greed and falling prices by the awakening of fear This emotional war between greed and fear generates a

swinging price movement that provides a perfect opportunity for swing trading Swing Traders capitalize on the emotions of others while they carefully control their

own emotions and systematically enter and exit trades Swing Traders recognize the levels of support and resistance They understand the concepts of momentum and volatility and can identify a trading range or channel

Equity trading provides a natural arena for Swing Traders As price seeks an

equilibrium state, Swing Traders seek to exploit direct price thrusts as they enter positions at support and resistance By examining chart pattern characteristics they make money in both trending and range bound markets Swing Trading is a classic strategy that involves holding stocks for a short period of time, typically between a few days to a few weeks Unlike day trading, Swing Trading is independent of time – nevertheless, some Swing Traders will exit a slow-moving position and move onto the next opportunity

Swing Trading is very popular among short-term and medium-term traders It offers many virtues compared to the hyperactivity of day trading With recent changes in SEC regulations that affect the way brokerage firms administer margin to 'Day

Trading' accounts, many day traders have moved away from day trading towards a swing trading style

Larry Swing has developed a wonderful software program called SwingTracker that allows users to scan all listed stocks using his Swing Trade Identifiers to identify

swing trading opportunities The program allows the user to monitor their trades in

real-time His technical analysis concepts of EquiVolume and Force Index coupled

with his Swing Trading tactics are a marvelous contribution to the swing trading community

Larry Swing has mastered the art of Swing Trading His website –

www.mrswing.com – not only presents the theoretical underpinnings of swing

trading, but provides a detailed road map of how to use them This book – A

Practical Guide to Swing Trading – communicates the essence of his ideas in a simple and straightforward way It describes the tools necessary to identify swing trading opportunities, and the guidelines needed to implement his strategy

This book is filled with innovative, important trading techniques This book is a great asset to both beginner and experienced swing traders

Suri Duddella

President & CEO

siXer.com, inc

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Dr Sergey Perminov, OptionSmart.com

Nowadays, when the number of online traders is growing very fast, the need for a good book is obvious Larry’s new book provides a unique combination of

professionalism and simplicity, presented in an easy-to-read style This kind of book

is currently in short supply

Larry writes about real trading situations, explaining how to reduce risks and

enhance returns The book contains practical examples and explanations how to handle the various scenarios that might arise I feel comfortable saying that this is the best practical manual for swing trading that I have ever read

His focus on short-term (swing) trading is very understandable In the current, turbulent market environment, many people consider “buy-and-hold” investing to be

an outdated strategy However, they are not sure what else to do Swing Trading

offers a real opportunity to produce profits while keeping risk under control

The algorithms that Larry uses in SwingTracker are great at identifying swing trading opportunities – they are extremely valuable to both beginners and

experienced swing traders

Larry covers the whole process of swing trading, from soup to nuts He even

recommends brokerage firms that have features which are particularly useful to swing traders

Not only does this book introduce a set of helpful tools and tips, it describes way of thinking about trading and philosophy that allows the reader to feel confident about swing trading which leads to success and profits

Dr Sergey Perminov

OptionSmart.com

Founder & CEO

approach to swing trading

MrSwing runs a free educational website – www.mrswing.com – where he provides

specific instructions on how to swing trade He provides a free newsletter –

MrSwing Lite – that identifies many swing trading opportunities each week Larry has developed charting software – SwingTracker – that comes with a real-time

data feed to assist investors that need an inexpensive method to identify swing trading opportunities and monitor their progress

www.mrswing.com also has a free SwingLab that lists the criteria he personally

uses to identify stocks that are good swing trading candidates

MrSwing provides the investment community with a wonderful educational resource One can learn about the essentials of technical analysis, with instructions on how to

apply these principles to swing trading Over the years, Larry has developed a

fairly large library of books that discuss the principles behind swing trading

specifically, and making money in the stock market in general These personally recommended books can be purchased at www.mrswing.com

Hundreds of thousands of investors visit www.mrswing.com each year Here is what

they have to say about the web site, the educational material and his Master Plan

Since I found your web site and started trading using your guide lines, I

am up over $5000 in one month That is a big change from what I usually make John F Famularo, USA

Your selections look every bit as good if not better than subscriptions sites that charge up to $100/month Paul Bondy, USA

I really like your website Thanks for all the information you provide

Dallas Davison, US

Thanks for your terrific site and great plan! Thanks again and happy

(swing) trading! Richard Gorsline, USA

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Nice to see you offer this service I think your style is one of the safest

ways to make money David DeFina, USA

Love the SwingTracker program and software for daily real time market

data Larry Skrine, USA

I am impressed with your site and your subject matter I have been

taking recommendations from your swing lists, following your Master Plan and doing pretty well Stephanie Kemper, USA

Your Newsletter is great I thank you for your wonderful work, and wish

you all the best in the future God bless you Gnanam Nesan

I love SwingTracker nice program Bob Russel, USA

Some of the SwingLab scans (e.g., candles) are excellent, as are many of the analysis features All things considered, I think SwingTracker is a

great tool which I would not want to be without Jim Spears, USA

I'd like to thank you for putting such a great site on the web I have

learned more about short term trading from your site than from all the

other sites put together! Plus SwingTracker is a great trading tool

Roger Uglow, UK

I have loved going over your list for the last two weeks I'm a new

subscriber and your picks are saving me a ton of time (something I don't have much of) Thanks a million Scott Smith, USA

Nice to see you offer this service, I think your style is one of the safest

ways to make money David DeFina, USA

wouldbe, couldbe and wannabe a successful swing trader thanks for the site !!!! Andrew McCain, Australia

This site offers traders the ability to discipline themselves and the

resources they need to succeed in the art of swingtrading! Highly

Recommended! We endorse MrSwing

Oliver Velez and Anthony Nunes, Pristine.com

there's something I'll always be grateful to you about: this month I

realized I stopped trading on emotional impulses! I always knew emotion was THE enemy but I never could come up with a systematic and

meaningful swing entry and exit strategy Even though I could detect the moves, I was getting out with a bad timing by not defining risk in a proper manner Anyway, thanks MrSwing, you're the master!!

Arie Bensimon, Israel

Thanks for your help, four years of research and 500 web sites later, this

is one of the most useful! Jon Sproule, Canada

Well, you sure know how to cut the greed, I almost heard "grab another fifty as fast as you can!" Vive le Master plan, I'll stick to it this week with more affordable stocks though! But hey, The Plan is a major "How to"

When you're through with MA's and Fibonacci toolbox, you got a good feel

of the music, but still not dancing I'm a novice so your money

management principles are crucial Everywhere you read "be careful not

to be greedy but don't fear, protect your principal" … but HOW? It's like

this doctor that always prompted his patient to get better and never told him how Guess where the patient is now! Although the plan is rather

"mishna" style, I would have handled prior trades more successfully with

it Arie Bensimon, Israel

I really do appreciate your web site I have gone to many others for

advise/information and always felt that the message given was lacking

After examining your system, your information on how to Swing Trade

offers a solid but flexible alternative to Swing Trading that I have studied

in the past Ross McKnight, USA

I should be paying you! Paul J Krupin, USA

Larry is and has been involved in the development of many interesting IT tools used

by thousands of traders world wide Check out www.mrswing.com or

www.swingtracker.com or www.releaz.com or www.stockchartz.com or

www.eboox.net for more information

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4 An Introduction to Swing Trading

To make money in the stock market it is necessary to have a disciplined approach to trading We also believe that it is also important to keep things simple While our goal is to keep things simple, the trading rules might initially seem a bit complex However, once you learn the rules and you trade with discipline, you will make money in the stock market

Swing trading allows you to make money when the market is bullish, or bearish, or just going sideways That is why it has a distinct advantage over other approaches

to investing The goal is to make money, not to rest one’s hopes on the future of a stock, a sector, or the economy

4.1 What is Swing Trading

Everyone is familiar with waves A wave alternates from positive to negative, then

to positive and negative, and so on Waves are found in nature – you see waves when you throw a rock into a lake Sound is transmitted in waves And when stock prices change, they follow a wave-like pattern The wave is rarely as orderly a sine wave, but they are waves nevertheless, and we use these waves in Swing Trading

4.2 Let’s Look at an Up Trends

The chart below shows the price movement of Myriad Genetics (MYGN) in an

uptrend Notice that after the price moves up, it takes a rest, or pulls back When

we swing trade an uptrend, we buy on the pull-back

An uptrend can be identified by a series of higher highs and higher lows (the bottom

of each pull-back) In other words, an uptrend is a series of successive rallies with each rally going higher than the previous one and each pull-back stopping above the previous one

The price movement looks more like the zig-zag of a saw blade than a sinusoid, but

once an uptrend is established the pattern tends to repeat itself In swing trading

we capitalize on the predictability of the pattern We buy during the pull-back to

increase our chances of making a profit

Figure 1 : up trend

4.3 Let’s Look at a Down Trend

The chart below shows the price movement of Verisign (VRSN) in a downtrend Notice that after the price moves down, it takes a rest, or pulls up The price

movement follows a zig zag pattern

A downtrend can be identified by a series of lower lows and lower highs (the peak

of each pull-up)

When we swing trade a downtrend, we sell short during a pull-up If you are

unfamiliar with selling short, we discuss it in the next session

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Figure 2: down trend

4.4 The Steps in Swing Trading

First, restrict your selection to the universe of stocks that fulfill certain criteria Choose stocks that …

• Have a price of at least $7

• Have an average daily volume of at least 500,000 shares

Then …

STEP 1 – Identify a stock that is in an uptrend or a downtrend

STEP 2 – For stocks in an uptrend, identify those that are experiencing a pull-back

For stocks in a downtrend, identify those that are experiencing a pull-up

STEP 3 – Once an appropriate candidate is identified, place a limit order to buy

(uptrend) or sell short (downtrend) the stock based on the Master Plan STEP 4 – Once a stock has been traded (a position opened), place a stop-loss order

to limit downside risk and place a limit order to identify the price at which you will take profits (Ideally, these two orders are placed together as an

OCO (One Cancels Other) order; this is sometimes called an OCA (One Cancels All) order

STEP 5 – At the end of each day, adjust the stop loss prices based on the Master

Plan

4.5 What Can You Expect?

First – only a portion of your trades will be executed The Master Plan is designed

to only trade stocks that initially move in the anticipated direction If the price moves in the opposite direction (continues pulling back or pulling up), the trade is not placed

Second – you will be holding positions for a limited amount of time While swing

trading is not day trading, you are only holding positions until targets are

met

Third – some of your trades will result in losses, however losses are minimized by

the Master Plan which raises the stops as the stock price rises; this is known as trailing stops Being disciplined, and following the Master Plan will insure that profits exceed losses which means you will make money

4.6 How Do You Identify Stocks that are Appropriate

for Swing Trading?

All of the methods that are used to identify stocks that are appropriate for swing trading are based on technical analysis Technical analysis is a way of using

historical price/volume patterns to predict future behavior It is not necessary to

have a detailed understanding of technical analysis in order to swing trade

There are tools available that can assist investors at every level – from novice to expert While there are many sources of information and tools that help identify

swing trading opportunities, this book will focus on those provided at

www.mrswing.com Once you understand the principles, you can explore other sources of information

4.7 What Tools are Available?

The tools fall into several categories

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• Subscriptions services that provide daily swing trading recommendations –

www.mrswing.com offers a service called MasterSwings Larry Swing uses technical analysis and pattern recognition software (SwingTracker) to

identify candidates for swing trading Every evening, subscribers receive

e-mails that identify several different types of patterns that are conducive to

swing trading Aside from showing you the pattern, the email indicates the

current price, the entry price, the target (limit) price for taking profit, and the stop loss price for limiting downside risk This service can be used by

investors at all knowledge levels

An example of a MasterSwings email alert for Lockheed Martin (LMT) is

shown on the next page A candlestick chart shows the recent price action for LMT, and a table indicates the closing price and all three action prices – the price to buy (using a buy stop order), the target price which is 7% above the purchase price (using a buy limit order), and the protective stop price which

is approximately 4% below the purchase price (using a sell stop order) The 20- and 50-day moving averages (MA) are also shown so that you can more easily visualize the direction of the trend

The rational behind these prices are discussed in the section entitled The Master Plan

• Software that scans historical stock prices and identifies swing

trading patterns – SwingTracker is a real time charting program available

at www.mrswing.com that is designed to identify swing trading

opportunities While SwingTracker has many features (described in the Appendix), the scan feature is used to identify stocks whose price action

show patterns that make them good candidates for swing trading

The scan feature allows you to identify patterns based on price history,

volume history, moving averages, technical indicators, candlestick criteria,

and fundamental company characteristics Scan criteria are saved in a scan library so they can be used over and over again A scan scenarios (also called a template) can be used to evaluate patterns in over 6000 stocks on

the NYSE, the AMEX, and the NASDAQ This evaluation happens in real time

During the day, you can use SwingTracker to watch the price and volume behavior of individual stocks You can easily monitor stocks on a favorites

list, and set alerts to tell you when particular prices are reached These

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features are available from other services, usually at a higher cost than

SwingTracker

Since SwingTracker was designed by Mr Swing, it comes with the ability to

identify his favorite swing trading patterns, including those used to identify

stocks for the MasterSwings service

We will describe some of the criteria used to select swing trading candidates

in the section entitled Pattern Recognition Criteria

• MrSwing Lite is a free newsletter that is published once a week – it identifies several stocks that are good long and short swing trading opportunities You

can look at the price pattern and obtain the necessary quote information (previous day’s high, low and close) using web sites like

www.yahoo.quotes.com or www.stockchartz.com

Not surprisingly, MrSwing recommends using SwingTracker to examine the

price patterns and quote information because it is specifically designed for swing trading Choose the tools that suit your needs and your budget

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5 Pattern Recognition Criteria

While looking at a chart can often tell you whether a stock is appropriate for swing trading, it is very time consuming to look at charts, particularly if you look for

opportunities every day Another way to identify good stocks is to use software that can scan all of the listed stocks based on a series of algebraic equations that

represent the characteristics of a good chart pattern I use SwingTracker to

accomplish this task

Before discussing the specifics of pattern recognition criteria, we’ll briefly

consider the measures used in the algebraic equations Some of the measures are simple descriptive variables (e.g., the high price for the previous day or the average

volume over the past 20 days) Other measures are based on technical analysis which is discussed in more detail in the Appendix Technical analysis has many

different indicators from a simple moving average to a complex oscillator It is not necessary to have an in-depth understanding of technical analysis to be a successful swing trader, however, it is helpful to have a rudimentary understanding of how we approach swing trading pattern recognition

5.1 Technical Analysis Measures used to Recognize

Swing Trading Patterns

To begin with, we typically restrict our selections to stocks that are at least $12 in price, having an average (20 day) daily volume of at least 500,000 shares Since market makers can more easily manipulate low price, low volume stocks, we stay away from them

For long swings we are interested in identifying stocks that are in an uptrend One

of the indicators we use is a simple moving average (SMA) A moving average is

simply the average closing price for a particular number of days It’s called a moving average because on each new day, the current day’s price is added to the average while the oldest price is dropped We typically focus on three moving averages, those based on 10 days, 20 days and 50 days All moving averages smooth the price movement and make it easier to identify trends It is also significant to know where today’s price is relative to the moving averages and whether the shorter time-frame moving average is above or below the longer time-frame moving average Two indicators that a stock is in an uptrend are:

• Today’s closing price is above both the 10-day and 20-day moving averages

• The 10-day moving average is above the 20-day moving average

When looking for a long swing, we would like to identify stocks that are

experiencing a brief decline (pullback) We can identify a 3-day pullback as follows

• Today’s high price is lower than yesterday’s high

• Yesterday’s high is lower than the high the day before

We also use a technical indicator developed by Dr Alexander Elder called the Force Index This index combines the magnitude of the price change with the direction of

the change and the trading volume In order to confirm the relative force behind an uptrend and a pullback, we use a 3-day moving average and a 13-day moving

average of the Force Index The following conditions demonstrate that the bears have been winning the short-term battle while bulls are dominating the longer

frame:

• The 3-day moving average of the Force Index is less than 0, and

• The 13-day moving average of the Force Index is greater than 0

Another technical indicator we like to use is the Directional Movement Index (DMI) that was developed by J Welles Wilder Jr It is used to determine whether a stock is

trending or not trending (i.e., moving sideways) In SwingTracker we provide the

two components of this indicator – the Positive Directional Index (+DI) and the Negative Directional Index (-DI) – along with a 20-day moving average based on these two measures (ADX) An uptrend is confirmed if …

• ADX is higher than 30

• +DI is greater than –DI

Our most successful pattern recognition formulas are available to all visitors (free of charge) at www.mrswing.com in the SwingLab section of the web site You can copy the formulas into SwingTracker and scan all listed stocks at any time These are the same formulas that provide the MasterSwings recommendations The formulas will be built into the next version of SwingTracker

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6 The Master Plan – Entry and exit rules that insure successful swing trading

6.1 WHAT is the Master Plan

The Master Plan is a set of rules that determines when to enter and exit a trade At

first, it might seem a little complicated, but once you have place a few trades using

the system, you’ll realize it’s really quite simple The best part about the Master Plan is that you don’t need to use judgment The rules are mechanical Two

obstacles to successful trading are the human emotions of fear and greed By

following the Master Plan, these emotions will not influence your behavior, nor will they interfere with your success

To keep it simple, we’ll first focus on the long trade The rules for a short trade are simply the mirror image of the rules for a long trade An example of a long swing

opportunity is shown below The price has declined (pulled back) and you are bullish

on the stock

The secret to swing trading success is:

Confidence, Discipline, Focus and Patience

6.2 Taking a Profit and Preserving Capital

An important aspect of the Master Plan is setting a profit target and preserving

capital The approach is fairly conservative – the profit target is approximately 7% with a potential loss capped at 4% The actual profit is likely to be more than 7% while a loss is likely to be smaller than 4% Here’s how it works

• Once the target price is reached (7% above the entry price), half of the shares are sold, locking in a 7% profit The other shares remain invested to benefit from any further increase in price

• If the price moves against the trade, the maximum loss tolerated is 4% This preserves capital for future trades

• Typically, more trades will produce a profit than a loss The net result is profit

• The movement of the entire market is very powerful When the market is moving with your trades, a very high percentage of your trades will be

profitable

• When the entire market is moving against your trade, a higher than expected

percentage of your trades will lose The stop loss protects you from

excessive losses

6.2.1 Profit is taken using a “sell limit” order – once the

price is reached, the specified number of shares are sold

6.2.2 Capital is protected using a “stop loss” order –

when the stop price is reached, all the shares are sold.

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6.3 When to Enter the Trade

Using the Master Plan, swing trading opportunities are identified after the market

closes Trades are entered in the morning, usually within the first half hour of

trading When you enter the trade (and the decision rule you use) depends on whether or not the stock has gapped up or down from the previous day’s closing

price According to the Master Plan, a stock is considered to have gapped up when

it opens 50 cents or more higher than the previous day’s close; it is considered to have gapped down when it opens 50 cents lower than the previous day’s close

Most frequently, the stock price will open within 50 cents of the previous day’s

close, neither gapping up nor gapping down

• The most common occurrence – the stock opens within 50 cents ($0.50) of the previous day’s close – the order can be placed a few minutes after the market opens

• Occasionally a stock gaps up 50 cents or more compared to the previous day’s close – the order is placed at least 30 minutes after the market opens

• Occasionally a stock gaps down 50 cents or more compared to the previous day’s close – the order is placed approximately 5 minutes after the market opens

• To summarize, if the stock gaps in the same direction as the trade, wait 30 minutes, and if the stock gaps in the opposite direction of the trade, wait

5 minutes

6.4 How to Enter the Trade

As with when to trade, how to enter depends on whether the stock gaps up/down

or not Typically, the stock price doesn’t gap up or down and the entry price is based on the previous day’s prices When the stock gaps up or down, the entry price

is not based on the previous day’s prices, but on the current day’s prices Whether

Buying AFTER the open is BETTER Wait a few moments to allow the market to breath normally

based on the previous day’s prices or the current day’s prices, the entry rules are the same

• The most common occurrence – the stock opens within 50 cents

($0.50) of the previous day’s close – buy the stock the moment it trades

6 cents (1/16) above the previous day’s high This can be accomplished by using a buy stop order This increases the likelihood that the price is moving

in the direction of the bullish (long) trade

• Occasionally a stock gaps up or down 50 cents or more – buy the stock the moment it trades 6 cents above the high of the new day This would be

30 minutes after the market opens for a gap up or 5 minutes after the market opens for a gap down

6.5 What to do After the Trade is Executed

Once the trade is executed, the exit orders are placed

• The profit order – a sell limit order is placed at a price that is 7% above the

Page 30

6.6 What to do the Day After the Trade is Executed

As with when to trade and how to enter, the following day’s activity depends on

whether the stock gaps up/down or not If the stock price doesn’t gap up or down,

the stop loss is changed based on the previous day’s prices If the stock gaps up or down, the stop loss is changed based on the current day’s prices Whether based

on the previous day’s prices or the current day’s prices, stop loss rule is the same

• When the stock opens within 50 cents ($0.50) of the previous day’s close – if 6 cents below the previous day’s low is higher than yesterday’s stop loss, raise the stop loss to this new price This is known as raising the trailing stop, which further limits the downside risk

• When the stock gaps up or down 50 cents or more – wait 30 minutes for a gap down or 5 minutes for a gap up – if 6 cents below the today’s low is higher than yesterday’s stop loss, raise the stop loss to this new price

6.7 What happens if the Trade is Not Executed

Let’s say that you are receiving recommendations from MasterSwings or MrSwing Lite and your trade is not executed on the day the order is placed You can repeat

the process for up to 5 trading days

• If the stock gaps up or down, wait the appropriate amount of time (30

minutes for a gap up and 5 minutes for a gap down) – determine the entry and exit prices based on the current day’s prices

• If the stock opens with 50 cents of yesterday’s close, the entry and exit prices are based on the previous day’s prices

The chart on the following page should make the trading rules clear

• Buy stop 6 cents

above today's price

• Sell stop at whichever

is higher – 4% below entry price or 6 cents below today’s low

• Sell limit for half the

shares at 7% above the purchase price

• Okay to place order

when market opens

• Buy stop 6 cents above

yesterday's high

• Sell stop at whichever

is higher – 4% below

entry price or 6 cents

below yesterday’s low

• Sell limit for half the

Yes

Yes

Gap

Up Gap

Down

No

• Sell limit for ½ the

shares remains the

• Sell limit for ½ the

shares remains the same

• Sell stop – whichever

is higher – yesterday’s stop loss

or 6 cents below yesterday’s low

• Wait 30 minutes

• Sell limit for ½ the

shares remains the same

• Sell stop – whichever

is higher – yesterday’s stop loss

or 6 cents below yesterday’s low

Repeat until the

Page 32

6.8 Once half the shares close at a 7% profit, the

other half remains open to “ride the wave”

When do we close the second half of the trade?

A trailing stop is used to close the 2nd half of the trade Remember that a trailing stop is used to raise the sell stop (stop loss) during the trade The same rules apply (see 6.6 above) The shares are sold when the price drops to 6 cents below

the low of previous day (no gap on open) or the current day (gap on open)

6.9 The Short Swing – how we make money when we

think the price of the stock is going down

A short swing is used to make money when a stock’s price is predicted to go down

We sell short the stock For those unfamiliar with shorting stocks, we sell the

stock without having previously owned it Additional detail about shorting stocks can

be found the Appendix For now, it is only necessary to know that our goal is to sell the stock and buy it back at a lower price

While anyone can sell short, you must make sure that your brokerage account is

approved for trading on margin If you do not have a margin account, simply fill

out the necessary forms with your current brokerage firm or open an account with

one of the firms recommended for swing trading

A short swing is a mirror image of a long swing The price of a stock in a

downtrend tends to have periodic, short-term rallies (pull-ups) as the price moves

lower The set up for a short swing is the brief rally (or pull-up) The decision rules in the Master Plan help enter the trade when the stock is resuming it’s

downward path

A chart showing a downtrend that is conducive to short swing trading is shown on

the next page

Notice in the chart below that the downtrend is interrupted by short-term rallies (pull-ups) The trade is placed after a short-term rally (or pull-up), once the stock resumes its downtrend

The trade is entered on a day when the price falls below the low of the previous day

The rules for entering and exiting a short swing are shown schematically on the

next page

While the rules might seem somewhat complicated, several brokerage firms make

the process quite easy Interactive Brokers – described in the next section –

allows you to enter the three components of the trade all at the same time For a

short swing they are:

• A sell stop to sell the stock when the price moves below the stop price

• A buy stop to buy back the shares if the price moves up 4%

• A buy limit to lock in profits (on ½ the shares) when the price drops 7%

The schematic diagram provides instructions for how to adjust these prices on the

second day, third day, and so on, based on whether the stock has been sold short

or not The schematic provides exit instructions as well

• Sell stop 6 cents

below today's price

• Buy stop at whichever

is lower – 4% above entry price or 6 cents above today’s high

• Buy limit for ½ the

shares at 7% below the purchase price

• Okay to place order

when market opens

• Sell stop 6 cents below

yesterday's low

• Buy stop at whichever is

lower – 4% above entry

price or 6 cents above

yesterday’s high

• Buy limit for ½ the

shares at 7% below the

purchase price

No

Stock is Sold Short

Next Day Stock Opens with a Gap

Yes

Yes

Gap

Up Gap

Down

No

• Buy limit for ½ the

shares remains the

• Buy limit for ½ the

shares remains the same

• Buy stop – whichever

is lower – yesterday’s stop loss

or 6 cents above yesterday’s high

• Wait 5 minutes

• Buy limit for ½ the

shares remains the same

• Buy stop – whichever

is lower – yesterday’s stop loss

or 6 cents above yesterday’s high

Repeat until the

7.1 optionsXpress

optionsXpress is a discount broker that has many features to help the swing trader While the name suggests a specialist in options, you can trade stocks, bonds, and mutual funds as well optionsXpress also has a unique autotrading service called Xecute SM which we use for several of our services including QQQ Swings, OEX Swings, DIA Swings and SMH Swings In the near future you will also be able to trade our OptionSwings service using Xecute SM If you are a

subscriber to one of our services, our trade recommendations go directly to

optionsXpress and they can automatically place the buy and sell orders in your

account This is particularly convenient for subscribers who are unable to watch the market

For swing traders, optionsXpress has a feature called One Cancels Other

(OCO) Once the trade is placed, both closing sell orders can be placed

simultaneously (the limit and the stop order) – when one is executed, the other is

cancelled By the time this book is published, optionsXpress will also have a

feature that allows a buy and sell order to be placed simultaneously They continue making improvements based on the needs of their customers

Autotrading means that optionsXpress can executes your QQQ Swing trade

recommendations automatically based on your specifications in your brokerage account and sends QQQ Swings trade alerts

optionsXpress offers additional features that are valuable to all investors:

• Streaming real-time quotes including after hours prices

• High-speed execution

• Low commissions (e.g., $19.95 for stocks, $14.95 for mutual funds and up to

10 options contracts)

• State-of-the-art charting, technical analysis and order entry

• Up-to-the-minute commentary and market statistics

• features specifically designed for options traders – the ability to place easily trade calls, puts, spreads, straddles, strangles, butterfly’s etc

• tools specifically designed for options traders including Option Dragon (a screening tool) and Option Pricer

• Options can be traded in retirement accounts and custodial accounts

You can open an account at http://www.optionsxpress.com/

Page 36

8 The Essentials of Technical Analysis

8.1 Intro

We humans have a very hard time making fast decisions with complicated info That

is why, as human traders, we try to simplify trading as much as possible, in order to scan fast & accurate trading opportunities in a few seconds As Albert Einstein used

to say: keep things as simple as possible nut not any simpler!

The following Technical Analysis (TA) tools are part of the daily charting arsenal: Candle stick

8.2 Why does Technical Analysis work?

Simply because the large professional traders cannot help leaving behind

considerable evidence regarding their opinion on the direction of the market: volume provides clues as to the intensity of a given price move

The key is psychology: you trade people, not stocks People never change most traders keep on making the same mistakes again and again luckily for us Read this again and think about it!

8.3 The Basics

A stock price is determined by an exchange between buyers and sellers If there happens to be more buyers than sellers then the market goes up On the contrary, if there happens to be more sellers than buyers then the market goes down Logical!

The price at which a stock is offered affects the trader's decision If a trader is long and the stock starts to decline, the trader could be forced to close his position If short, he might do likewise on a rising stock

When a trader takes a long position, he becomes a potential seller, while short positions are held by potential buyers As prices change due to buying and selling pressure, information about the condition of the stock is revealed by the combination

of price and volume action

8.4 Japanese Candle sticks

In the 1600s, the Japanese developed a method of technical analysis to analyze the price of rice contracts This technique is called candlestick charting Steven Nison is credited with popularizing candlestick charting and is now recognized as the leading expert on their interpretation

Candlestick charts display the open, high, low, and closing prices in a format similar

to a modern-day bar-chart, but in a manner that extenuates the relationship

between the opening and closing prices Candlestick charts are simply a new way of looking at price; they don't involve any calculations

Figure 3: An open candle stick chart

High volume levels are characteristic of market tops when there is a strong

consensus that prices will move higher High volume levels are also very common at the beginning of new trends (i.e., when prices break out of a trading range) Also, just before market bottoms, volume will often increase due to panic-driven selling Volume can help determine the strength of an existing trend A strong up-trend should have higher volume on the upward legs of the trend, and lower volume on the downward (corrective) legs Similarly, strong downtrends usually have higher volume

on the downward legs of the trend and lower volume on the upward (corrective) legs

8.6 Equivolume

Equivolume displays prices in a manner that emphasizes the relationship between price and volume Equivolume was developed by Richard W Arms, Jr., and is

explained in greater detail in his book “Volume Cycles in the Stock Market”

Instead of displaying volume as an "afterthought" on the lower margin of a chart, Equivolume combines price and volume in a two-dimensional box The top line of the box is the high for the period and the bottom line is the low for the period The width

of the box is the unique feature of Equivolume - it represents the volume for the period